In the 50s, the stock market looked vastly different than it does today.

Only a small fraction of Americans—around 4%—participated in stock ownership according to census data from the time.

For most people, investing seemed out of reach. Stock trading was done entirely on physical trading floors of exchanges like the New York Stock Exchange. 

Brokers communicated with loud hand signals and phone calls to execute orders.

Commission fees were high, often a percentage of the trade value, acting as a deterrent to many small investors.

Investment choices were limited to what one’s broker offered access to based on their firm’s research capabilities.

There was little price transparency between brokers competing for order flow. As a result, average holding periods for stocks were much longer as transaction costs discouraged churn.

This began to change in the 80s with technological advances.

The first electronic brokerages emerged, allowing trades to be placed by phone and reducing commissions.

In the late 80s, electronic communication networks (ECNs) like Instinet brought more competition, further lowering costs.

Online brokerages in the 90s like E-Trade brought the convenience of internet trading to individual investors.

Gradually, stock ownership expanded beyond the affluent. By the late 90s, over 50% of U.S. households owned equities, versus less than 20% in the 50s.

While equities became almost fully electronic, credit markets, consisting of corporate bonds, municipal bonds, and other fixed-income assets, remained primarily dealer-driven and over-the-counter (OTC) well into the 2000s.

Trading was still done via phone calls between institutional investors and dealers at large banks.

There was little pre-trade pricing transparency. Liquidity was sourced based on long-standing relationships rather than competitive online markets.

As a result, bid-ask spreads remained wide, especially for less liquid bonds.

As the digitization of credit trading began in the early 2000s, one of the pioneering companies in this shift was MarketAxess (MKTX).

MarketAxess launched its electronic trading platform for bonds the following year, seeking to bring much-needed transparency, liquidity, and cost savings to the OTC credit markets.

In its early years, the transition was slow as the dealer-driven phone-based system was entrenched. 

However, MarketAxess saw steady client adoption and market share gains as more institutional investors and dealers recognized the efficiencies of online trading.

By the late 2000s, MarketAxess had become the dominant player in key segments like US investment grade bonds, regularly capturing over 15% of total US IG trading volumes.

This market-leading position provided significant competitive moats against new entrants.

As electronic trading continued growing in the 2010s and 2020s, accounting for an estimated 35-50% of total US credit volumes by 2024, MarketAxess remained well positioned to capture additional share.

New product launches and geographic expansions into Europe and Asia further diversified its growth opportunities.

However, Marketaxess is not priced accurately for its growth potential…

The market expects Marketaxess’ earnings to shrink instead of growing.

While electronic trading has grown, adoption has lagged behind equities—even today less than half of U.S. credit volume is executed electronically.

The trend is undeniably shifting as institutional investors and dealers recognize the benefits of competitive online markets and price transparency.

Going forward, as credit markets complete their migration online over the coming decades, MarketAxess will benefit as the established pioneer in the space. 

This positions it for strong continued earnings and share gains as trading shifts to its platform.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research

Today’s highlight, MarketAxess (MKTX) is one of the top stock picks from FA Alpha 50 this month. To see more stock picks like this, become an FA Alpha and get access to FA Alpha 50.